Regulation could toughen up on money market funds' liquidity

On the 11/20/20 at 8:04AM


Tuba Raqshan

The strong regulatory supervision of money market funds could lead to potential changes related to minimum liquidity requirements, according to latest research from Fitch Ratings.

The Covid-19 market stress during March 2020 had a material impact on short-term markets, with some money market funds (MMFs) experiencing elevated redemptions, price volatility and limitations on the ability to sell securities, stated Fitch Ratings. It also recalled that the 2008 market stress affected MMFs similarly and led to significant regulatory changes. Regulators had increased their scrutiny on MMFs this year, during the crisis.

Potential regulatory changes, notably relating to liquidity such as increased minimum regulatory liquidity requirements, may increase ratings headroom for MMFs, although the probability, extent and timing of regulatory change remain unclear, highlighted Fitch Ratings. Objective minimum liquidity requirements increase MMFs resilience. However, during the March 2020 crisis, certain MMFs chose to sell assets rather than use available weekly liquidity assets to mitigate any adverse investor reaction, which shows these buffers are not functioning entirely as intended.

Market participants believe that regulators may consider changes to minimum liquidity requirement, particularly in connection with trigger points for fees and gates. Other potential changes that could come under consideration include outright bans on certain types of MMFs, changes to liquidity fees and redemption gates, and changes to net asset value collars (for certain European funds).